The Financial Intelligence Unit India (FIU-IND) recently issued show cause notices to nine offshore cryptocurrency and virtual digital assets service providers (VDA SPs). These prominent entities include Binance, Kucoin, and Huobi. The notices come as a result of these organizations’ non-compliance with select provisions of the Prevention of Money Laundering Act (PMLA).
Understanding the Prevention of Money Laundering Act (PMLA), 2002
The PMLA is a legislation introduced by the Indian government in 2002, with the core objective of preventing money laundering and associated crimes. To ‘launder’ money means to make illegally acquired funds appear legitimate, effectively integrating them within the financial structure of the economy.
This act was primarily established as a response to India’s global commitment, including its adherence to the principles laid out in the Vienna convention, to combat the issue of money laundering.
Regulatory Authorities Overseeing the Execution of PMLA
Two key agencies are tasked with enforcing and overseeing the PMLA – the Directorate of Enforcement (ED) and the FIU-IND.
The ED operates under the Department of Revenue of the Ministry of Finance, with its primary responsibilities being investigating and prosecuting instances of money laundering. The Supreme Court of India recently affirmed that the ED cannot make arrests under the PMLA without establishing substantial reasons beyond non-compliance with queries and summons.
Conversely, FIU-IND is a national agency that handles the processing, analysis, and dissemination of information concerning suspect financial transactions. This information is disseminated to the appropriate enforcement agencies, including foreign FIUs. FIU-IND operates under the Ministry of Finance.
PMLA Compliance Obligations for VDA SPs
There are two main aspects associated with PMLA compliance for VDA SPs – registration requirements and activity-based compliance.
Any VDA SP involved with activities such as fiat currency transactions, data transfer, safekeeping or control over digital assets must register with FIU-IND as reporting entities.
Meanwhile, PMLA obligations are not dependent on physical presence but are instead activity-based, involving duties such as reporting, record-keeping, and adherence to other specific obligations.
Regulatory Framework Expansion & Enforcement Related to PMLA
The regulatory framework for money laundering experienced a significant expansion in March 2023. This included bringing VDA SPs under the Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework within the PMLA.
Under this law, all reporting entities are obligated to maintain up-to-date Know Your Customer (KYC) details, client identity records, benefit owner information, account files, and business correspondence related to clients. Furthermore, reporting entities are required to file Statements of Financial Transactions (SFT) containing explicit details of certain financial transactions or reportable accounts maintained during the financial year under the Income Tax Act.
This article has recounted the recent events surrounding the issuance of show cause notices to offshore cryptocurrency and virtual digital assets service providers. These notifications, issued by the Financial Intelligence Unit India, relate to non-compliance with certain provisions under the Prevention of Money Laundering Act.
